CVC Capital has taken over the majority shareholding in the Matahari Department Store from the Lippo Group. However, many doubt that the group really released one of its cash cows.
LOTS of red paper lanterns and Chinese accessories filled the counters of the Matahari Department Store in the Bandung Indah Plaza. On Wednesday last week, several sales promotion girls wearing special Chinese-style red and white Cheongsams added to the atmosphere in the run-up to Chinese New Year at this shopping center in Jalan Merdeka. Mandarin songs also entertained the many visitors who were shopping or just looking.
This shop in the heart of the so-called Paris of Java is just one of the 90 Matahari Department Store shops found in 50 cities. The total of shops will be increased because this retail company belonging to the Lippo Group is going to build new shops in several cities. “Every year we will add between eight and 10 new shops, more if we have the opportunity,” said the Communications Director of PT Matahari Putra Prima Tbk, Danny Kojongian, in Jakarta last week.
Adding new shops certainly requires a large investment. Every new shop requires funds of between Rp20-30 billion. With average profit of between Rp150-300 billion per year, it’s by no means easy for Matahari to realize this ambition. But that was in the past. Now adding new shops seems relatively simple to realize because this company has a new shareholder with much capital. Its name is CVC Capital Partners, a private equity company from Luxemburg (see From the Middle East to the US).
The entry of CVC Capital into Matahari Department Store was through a rather difficult transaction. It was not surprising that the stock exchange authority summoned the management of Matahari. According to Eddy Soegito, Director of the Stock Exchange, on 28 January the management of Matahari Putra came to the stock exchange to explain the transaction with CVC Capital. “We asked about the structure of the sale, the goals for utilizing the funds, and several other matters that were unclear,” said Eddy in Jakarta last week.
The Matahari Department Store transaction began when PT Matahari Putra Prima Tbk and CVC Capital set up a joint venture company together named Meadow Asia Company Limited. CVC Capital controls 80 percent of Meadow Asia’s shares, while Matahari Putra owns 20 percent. Then Meadow Asia and Matahari Putra signed a sales-purchase agreement on 23 January. In this agreement, it stated that Meadow Asia would purchase a 90.76 percent share in PT Matahari Department Store Tbk owned by Matahari Putra. The transaction value was US$770 million or around Rp7 trillion.
Meadow Asia will only control an 80 percent share in PT Matahari Department Store Tbk, while Matahari Putra will only control a 20 percent share—much less than the 90.76 percent that it controlled to begin with. Meadow Asia will control its share in Matahari Department Store through PT Asri Agungpermai. In this transaction, CVC Capital only paid Rp5.28 trillion in cash to Matahari Putra. As regards the remainder, this investment company will pay with 17.16 million normal shares or a 20 percent share in Meadow Asia.
CVC Capital also gave 71.13 million preferential shares and 8.88 million Meadow warrants with an execution price of Rp10,000 per share to Matahari Putra. At any time Matahari Putra can exchange these preferential shares and warrants with normal Meadow Asia shares. If this were to happen, then Matahari Putra shares in Meadow Asia, and automatically in Matahari Department Store, would rise again to more than 20 percent. “We are ready to add even more so that we have a 30 percent share in the department store,” said Managing Director of Matahari Putra Prima, Benjamin Mailool.
The transaction was all the more intricate because of the loan from Matahari Putra to CVC Capital worth Rp1 trillion. On the other hand, Matahari will also give a loan of Rp2.85 trillion to Asri Agungpermai. Matahari has obtained loan funds from Standard Chartered Bank and Bank CIMB Niaga. “The banks want to make these loans because the guaranty is shares in Matahari Department Store,” whispered a Tempo source in Jakarta last week.
Several analysts and fund managers have different opinions as regards this corporate action of the Lippo Group. Several are not convinced that Lippo would release one of its cash cows to another investor. Several others believe that this group has already sold Matahari to CVC Capital. “This certainly is a real deal. The majority share in Matahari Department Store was sold to a special purpose vehicle owned by CVC Capital together with Lippo,” said the Tempo source. Corporate observer Dick Hernawan is also convinced that Lippo has already released some shares in Matahari Department Store to CVC Capital.
Lippo, said Dick, once carried out a similar transaction when it released PT Natrindo Telepon Selular to the Maxis Group. In order to obtain a large amount of funds, Lippo sold a large share in Natrindo to this telecommunications company from Malaysia. “Now Lippo only has a 5 percent share in Natrindo.”
Lippo has certainly enjoyed the sweetness of the profit of the retail business. Because of this, the group will enlarge Hypermart, a business unit under Matahari Putra. Because the development of Matahari Putra needs a large amount of funds, Lippo sold a large amount of its shares in the department store to CVC Capital. Some of the proceeds will also be used to develop Lippo Karawaci, the main cash cow of the Lippo Group.
On the other hand however, there are groups that consider Lippo has not really sold off its department store. The Lippo-CVC Capital transaction is considered only as a Lippo-style restructuring and financial engineering trick—normal and legal in the world of finance. This business group is certainly wily and has often carried out the restructuring of companies. In 1996, for example, the Indonesian financial industry was in an uproar after seeing the restructuring of Lippo Bank, Lippo Securities and Lippo Life, which together was considered a conflict of interests. In 2004, these companies belonging to the Riady family again created a surprise by merging eight property companies.
One investment manager whispered to Tempo that from the release of its majority share in the department store, Lippo has a large amount of cash amounting to around Rp5.28 trillion. This will be used to repay debts and to develop Hypermart in order to resist the domination of Carrefour in Indonesia. But, according to him, Lippo has not completely released its control of Matahari Department Store because the transaction was only financial engineering. By being released to CVC, the department store unit is no longer consolidated in the Matahari Putra balance sheet. Matahari Putra’s cash position has improved and through Meadow Asia this company can borrow cash from overseas at low rates of interest.
There are other indications, according to him, that the department store is still controlled by Lippo. For example, CVC Capital has retail business management experience with Debenhams, the department store from England. Danny Kojongian acknowledged the matter of this management. “There are no changes in the management structure or the employees. All that has changed is the ownership structure.”
The appearance of loans in this transaction indicates that it was a leverage buy-out transaction. What this means is that private equity purchased the company with funds sourced from banks or the owner of the company to be acquired—in this case Lippo. It is as if CVC Capital owns the Matahari Department Store shares. “But later on, CVC Capital will release the shares back to the Lippo Group,” said the investment manager.
Akhmad Nurcahyadi, an analyst from BNI Securities, also feels that Lippo will not really leave the department store business. The reason for this is that this business is extremely mature. The prospects are also bright and far from dimming. “This business is one of the advantages of the Lippo Group,” he said. The Matahari Department Store chain is proved to be extremely strong. As a result, the department store business will still be defended by Lippo. Data shows that out of Matahari’s total sales of Rp12 trillion, Matahari Department Store provides a contribution of between Rp4 trillion and Rp6 trillion, Hypermart around Rp3.5 trillion, with the remainder from the Foodmart division, chemists and games (Time Zone).
As regards these sources of revenue, Danny clarified that Matahari Putra has not sold the department store, but rather in fact carried out a strategic alliance with CVC Capital. This alliance will strengthen Matahari Department Store to develop other businesses. Matahari, he said, was unable to refuse this proposal because CVC Capital’s planned investment in Matahari is in fact large. It certainly seems that money was the motivation for this transaction.
Padjar Iswara and Alwan Ridha Ramdani (Bandung)
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